Tax environment, rates key considerations for investors

“Tax policies should be predictable, transparent and consistent. The policies should be implemented for long-term to facilitate and protect investment plans of local and foreign investors,” he said, adding that no new taxes have been levied during the year except removing harsh anomalies – no supplementary budgetary measures.

The OICCI submitted suggestions proposals for the Budget 2022/23 to simplify the complex system of determining the corporate tax liability by abolishing the Alternative Corporate Tax (ACT); Revamping the MTR (Minimum Tax Regime); doing away with the undue recurring audit, examinations, reviews and recovery proceedings.

According to Khan, the tax authorities should use technology, data analytics, including artificial intelligence tools and make better and effective utilisation of NADRA database and other documented sources to ensure that all income earners are national tax number (NTN) holders and income tax return filers with the submission of annual income tax, wealth returns and wealth reconciliation statements.

The Federal Board of Revenue (FBR) and the State Bank of Pakistan (SBP) should devise a framework to ensure all customers of financial institutions whose account shows turnover in excess of Rs2 million or more during the year, have filed a tax return and wealth statement, he added.

For Khan, who is also the president and chief executive officer of Engro Corporation Limited, this could be done by the financial institutions simply notifying the names and CNIC numbers of such customers to the FBR without giving access to the bank accounts.

Art exhibition halls, hospitals where doctors practice, hotels and other public places holding large receptions for fashion houses and designers, sale of branded and designer dresses, airlines, travel agencies, etc, should provide names and addresses of the respective persons involved in these business activities to the FBR on a quarterly basis, he said.

Once the FBR receives the above information, it should be proactive and pursue potential taxpayers by sending them income tax return forms requiring them to file tax returns – rather than waiting for the tax returns to be filed, he noted.

According to the OICCI proposals, the government should eliminate the culture of amnesty schemes, as it discourages the honest taxpayers. Appropriate laws should be made to enable the government to seize local assets, in equivalent value, or levy appropriate taxes, if any person holds any kind of assets outside the country for which the source of income could not be established.

A number of ease of doing business (EODB) and simplification of tax paying process issues can be addressed by the introduction of simplifying the procedures and forms for filing the sales tax and income tax returns; single form for reporting all the tax liabilities in the country, including for the Federal Board of Revenue and provincial revenue authorities, with efficient inter-revenue authorities’ coordination. The single sales tax return has not been fully implemented.

The tax refunds are instrumental for both local and foreign investors. It is recommended that all the pending tax refunds be cleared in an orderly and prearranged manner. Inter-adjustment of income and sales tax refunds should be allowed as part of the law, the OICCI president said.

The withholding tax regime continues to be a key irritant for most taxpayers, especially the manufacturing and services sector and negatively impacts EODB.

The tax compliant sector provides the FBR with information of registered and unregistered businesses, which it should use as a tool for broadening the tax net. However, the revenue board unfairly penalises these commercial organisations by disallowing their legitimate expenses and input sales tax through measures like those covered under the income and sales tax laws.

For Khan, the revenue targets for tax offices should be in line with the business growth trends. Unrealistic targets leads to harassment of compliant taxpayers.

To encourage investment in manufacturing facilities, incentives provided previously through various “tax credits” under Section 65 of the Income Tax Ordinance, 2002, should be restored.

The OICCI will continue to emphasise on value creation through transparent and strong enforcement measures designed to facilitate compliant taxpayers and punish tax evaders.

Further, the value addition of our members should not only be measured on the tax collection basis but also on the basis of creating livelihoods, promoting sustainable business model and supporting a tax compliant echo system.

According to the proposals, the prevailing rates of minimum tax are too high for the taxpayers. The general rate of minimum tax under Section 113 of the Income Tax Ordinance, 2001 should be reduced to 0.25 per cent. For businesses dealing in sectors with high turnover and low margins, (eg, oil marketing companies, refineries, LNG terminal operators, large chemical companies, authorised dealers of local vehicle manufacturers, distributors and traders, including large trading houses, this rate should be applicable on gross profits instead of turnover.

Alternative corporate tax under Section 113C should be abolished in the presence of the minimum tax under Section 113. The withholding tax regime should be revamped and reduced from the existing over 26 to five rates only for income tax return filers. The withholding tax should be applicable on inactive taxpayers only, or alternatively; withholding tax rates applicable on services at the rate of 8 per cent is a minimum tax regardless of the actual taxable income of the service provider, he said, adding that this tax effectively becomes indirect tax and increases the cost of doing business for the service providers; hence, the tax on services should be made adjustable.

The OICCI also proposed the FBR to continue the previously announced policy to annually reduce the tax rate from 29 per cent to 25 per cent, including banking companies. The corporate tax rate in Pakistan, at 29 per cent, is higher than most of the regional countries.

The companies are required to pay various taxes in addition of income tax, i.e., WWF (2 per cent), WPPF (5 per cent), stamp duty, infrastructure Cess (1.2 per cent), etc, which ultimately results in effective tax rate of around 35 per cent to 45 per cent, which is far greater than the effective tax rates of other countries in the region.

Similarly, the sales tax rates (federal and provincial), both on goods and services, should be harmonised throughout the country.

The sales tax rate in Pakistan, at 17 per cent, is the highest in Asia. Our analysis shows an average of less than 12 per cent in Asia, with a range of 6 per cent to 17 per cent.

Moreover, different rates of sales tax on goods and services, i.e., standard, reduced, specified, etc, prevailing in the country lead to a number of issues for business organisations operating across the country.

The OICCI submitted recommendations to bring structural reforms in the Customs to bring illicit trade into the tax ambit.

It is recommended that the Customs valuation should be done by using the latest method of valuation, including online search and matching international and regional pricing and taking local legal brand owners on board.

Unauthorised imports of counterfeit products should be effectively checked through registration of brands with the Customs authorities in coordination with the original brand owner registered in Pakistan.

The data of import should be the public property (restrictively) to ensure transparency, which will also help takeover of goods under Section 25A of the Customs Act, 1969.

“We have suggested measures for the Afghan Transit Trade Agreement (ATTA) to revise the treaty based on current reality, to protect the revenue base of Pakistan without hurting the real spirit of such agreements,” the OICCI president said and urged the government to engage key stakeholders from the OICCI and the business community in Pakistan in such renegotiations.

It is recommended to fix quantitative limits for imports based on genuine Afghan needs and the size of the population. Besides, establish a basis of collecting duty and taxes at the point of entry into Pakistan for the account of the Afghanistan government.

There should be a negative list of items, which are not utilised in Afghanistan, yet are imported and make their way into Pakistan, it proposed.